... a panel of federal regulators charged with identifying market risks warned that a sudden rise in interest rates could have a destabilizing effect on financial markets... interest-rate risk as one of seven major vulnerabilities to financial stability....the scenario, which featured a mix of moderate recession, rising consumer prices and rapid increases in short-term interest rates, as might occur if oil prices were to shoot sharply higher. ... The longer the low interest-rate environment persists "the more very low interest-producing assets accumulate on their balance sheets,"..."At some point the Fed's going to have to raise rates, and the market value of those lower-yielding assets are going to go down."

"At some point the Fed's going to have to raise rates..."

But why? If it is a great policy, healthier for job growth than having market rates for interest , why would we ever stop manipulating the market for something as harmless as money?

It's almost as if the architects of the quantitative easing policies, trying to solve a non-monetary problem with monetary flooding, are admitting these policies are unsustainable, and that the longer the wrong policies continue the harder the fall will be. (Other than the readers of this forum), Who knew?

Mystery still surrounds Bitcoin, but buzz is growing, despite recent wild swings in the currency's value. Here's a rough timeline of the Bitcoin evolution. s

On Wednesday, Bitcoin, which can be used to make payments over the Internet without transaction fees or involving a financial institution, is expected to win its biggest validation to date with a $5 million investment in San Francisco-based Coinbase led by Twitter Inc. investor Union Square Ventures.

That investment would top last month's more than $2 million put into OpenCoin Inc., another virtual currency startup whose backers include venture firm Andreessen Horowitz.

"This is going to be a trigger point," said Union Square managing partner Fred Wilson of the Coinbase investment. "You'll see lot more venture money being poured into this space."

Coinbase operates an online service that allows users to buy Bitcoin, store the virtual currency in a digital wallet and pay merchants for goods or services with it. The company was founded last year by Fred Ehrsam, a 24-year-old former Goldman Sachs GS +0.98% trader, and 30-year-old Brian Armstrong, previously an engineer at short-term rental startup Airbnb.

Bitcoin is attracting attention as a wildly volatile, all-digital currency. How does it work? How are criminals taking advantage of it? How risky an investment is it? In this Bitcoin explainer, WSJ's Jason Bellini has "The Short Answer."

In April, the Coinbase co-founders said the company had about 116,000 members who converted $15 million of real money into Bitcoin, up from $1 million in January. Mr. Ehrsam said its dollar conversions are increasing by about 15% a week, and its user base is growing at a weekly rate of about 12%.

"We are in land-grab mode," said Mr. Ehrsam.

Coinbase profits by charging users a 1% fee to convert dollars to and out of Bitcoin. "We have a pretty clear business model," said Mr. Ehrsam. "It's not like we're eating Ramen every day."

Bitcoin is gaining traction with some small merchants and others who want to reduce costs associated with accepting credit cards, such as content-aggregation site Reddit.com, and OKCupid.com, a dating site owned by IAC/Interactive Inc. IACI +0.20% eBay Inc. EBAY +1.39% Chief Executive John Donahoe last month also said the e-commerce heavyweight is exploring ways to integrate Bitcoin into its PayPal payments network.

Supporters of Bitcoin, which was created in 2009 by a person or group that goes by the name Satoshi Nakamoto, say it offers anonymity and a cheap way to transact business across borders. But critics say Bitcoin faces so many regulatory and technical hurdles it will never mature into a mainstream currency.Last month, Tokyo-based Mt. Gox Co., the largest online exchange trading Bitcoin, said its services were disabled for approximately four hours by an Internet denial-of-service attack.

"Attackers wait until the price of Bitcoins reaches a certain value, sell, destabilize the exchange, wait for everybody to panic-sell their Bitcoins, wait for the price to drop to a certain amount, then stop the attack and start buying as much as they can," according to the exchange.

Coinbase Nabs $5M in Biggest Funding for Bitcoin Startup

That volatility is one of the concerns about the currency. Bitcoin rose in value from roughly $5 in June 2012 to a high of $266 in April and was down to about $108 on Tuesday, according to Mt. Gox data.

"If I really sat down and thought about writing a financial disclosure statement, I could probably list dozens of risks," said Union Square's Mr. Wilson.

Carol R. Van Cleef, a partner specializing in emerging payments and anti-money-laundering-compliance at Washington, D.C., law firm Patton Boggs LLP, said government financial reporting regulations likely will make it difficult for virtual-currency startups. The Financial Times reported on Monday that the Commodity Futures Trading Commission is discussing whether Bitcoin might fall under its regulatory jurisdiction.

Regulation is "going to force some players out of the market," Ms. Van Cleef said. Others, she added, "will bite the bullet and become compliant. But it will be expensive."That isn't stopping venture investors. Jeremy Liew, a partner with Lightspeed Venture Partners, which has invested in three virtual currency startups including OpenCoin, said he's "incredibly bullish" because it allows for cost-free micro-transactions—such as buying a single candy bar—that would be too small for other electronic payments. "The appeal of zero transaction costs is really strong and extremely disruptive for a massive industry, the payments industry," he said.

Chi-Hua Chien, a general partner at venture firm Kleiner Perkins Caufield & Byers who found the Facebook FB -0.41% investment while previously working at Accel Partners, said his firm is actively exploring investments related to Bitcoin and has already looked at more than two dozen such companies.

Mr. Chien estimates almost 100 companies are operating in the Bitcoin domain, including exchanges, payment processors and Bitcoin ATM machine operators. "It is completely crazy that money is not borderless," he said. "This is super-logical."

In February 2012, a number of hedge fund traders noted one particular index--CDX IG 9--that seemed to be underpriced. It seemed to be cheaper to buy credit default protection on the 125 companies that made the index by buying the index than by buying protection on the 125 companies one by one. This was an obvious short-term moneymaking opportunity: Buy the index, sell its component short, in short order either the index will rise or the components will fall in value, and then you will be able to quickly close out your position with a large profit.But February passed, and March passed, and April rolled in, and the gap between the price of CDX IG 9 and what the hedge fund traders thought it should be grew. And their bosses asked them questions, like: "Shouldn't this trade have converged by now?" "Have you missed something?" "How much longer do you want to tie up our risk-bearing capacity here?" "Isn't it time to liquidate--albeit at a loss?"So the hedge fund traders began asking who their counterparty was. It seemed that they all had the same counterparty. And so they began calling their counterparty "the London Whale". They kept buying. And the London Whale kept selling. And so they had no opportunity to even begin to liquidate their positions and their mark-to-market losses grew, and the risk they had exposed their firms to grew.So they got annoyed.And they went public, hoping that they could induce the bosses of the London Whale to force him to unwind his possession, in which case they would profit immensely not just when the value of CDX IG 9 returned to its fundamental but by price pressure as the London Whale had to find people to transact with. And so we had 'London Whale' Rattles Debt Market, and similar storiesThe London Whale was Bruno Iksil. He had been losing, and rolling double or nothing, and losing again for months. His boss, Ina Drew, took a look at his positions. They found they had a choice: they could hold the portfolio and thus go all-in, or they could fold. They could hold CDX IG 9 until maturity--make a fortune if a fewer-than-expected number of its 125 companies went bankrupt, and lose J.P. Morgan Chase entirely to bankruptcy if more did. Or they could take their $6 billion loss and go home. They could either take their losses, or sing "Luck, Be a Lady Tonight!" and bet J.P. Morgan Chase on a single crapshoot. After all, what could they do if the bet went wrong and they had to eat losses at maturity? J.P. Morgan Chase couldn't print money. So Drew stood Iksil down, and the hedge fund traders had their happy ending.

In late 2008, the Treasury bond went haywire. The interest rate on the Ten Year Nominal Treasury bond fell to 2.1% in the panic--clearly overpriced. In the late 1990s with the debt-to-annual-GDP ratio on the decline the Treasury bond had traded between 5% and 7%. In the 2000s with a weak economy the Treasury bond had traded between 4% and 5%. With the Federal debt exploding even faster than it had around 1990, it seemed to hedge fund traders very clear that the long-term fundamental value of the Ten-Year Treasury bond probably carried an interest rate of 7%, or more--and was at the very least more than 5%. So smart hedge fund traders shorted Treasuries, and waited for the Treasury Bond to return to its fundamental value.And they ran into the widowmaker.

So they scrambled around, wondering: "Why did the interest rate on the Ten-Year Treasury peak at 4%? And why has it gone down since then? And why won't it go back to its 5%-7% fundamental." And they looked around. And they found Ben Bernanke:

The Washington Super-Whale.He had printed-up reserve deposits, and used them to buy Treasury Bonds, and in so doing, they thought, had pushed the price of Treasuries up well beyond their fundamentals. Yet rather than easing off, taking his lumps, and letting the market "clear" he kept buying and buying and buying and buying, leaving the hedge fund traders with larger and larger and larger short positions in Treasuries that had to be carried at a loss. And every year that they carry those positions is a -2% times the size of the long leg negative entry in their cash flow.Bruno Iksil, they thought, had been pulled up short by his boss Ina Drew's unwillingness to bet the firm and risk bankruptcy. Ben Bernanke, they thought, ought to have been pulled up short by his regard for financial stability--by his promise to keep inflation at its target, for the counterpart to J.P. Morgan Chase's bankruptcy and liquidation would be the national bankruptcy that is another episode of inflation like the 1970s. But Ben Bernanke wasn't pulled up short by the risk of inflation. He had no supervising CEO. And he dominated the Federal Open Market Committee.But what Bernanke was doing, they thought, was as unprofessional as it would have been for Ina Drew to tell Bruno Iksil: "You turn out to have made a large directional bet that we can sell unhedged protection and profit? Let's see if you are right: let it ride!"And so they went public with the Washington Super-Whale, as they had gone public with the London Whale. Perhaps somewhere out there was an equivalent of Jamie Dimon who could tell Bernanke that it was time to unwind the Federal Reserve's balance sheet now? Jeremy Stein, perhaps?From my perspective, of course, the hedge fundies' analogy between the London Whale and the Washington Super-Whale is all wrong--the hedge fundies are thinking partial-equilibrium when they should be thinking general equilibrium. CDX IG 9 has a well-defined fundamental value: the payouts should each of the 125 companies go bankrupt times the chance that they will. What Bruno Iksil does does not affect that fundamental value. He can bet, and drive the price, but he cannot change the fundamental.But the Washington Super-Whale is different.In a healthy economy, the Ten-Year Treasury Bond does have a well-defined fundamental. When the economy is healthy enough that pricing power reverts to workers and keeping inflation from rising is job #1 for the Federal Reserve, the level of the Federal Funds rate now and in the future is pinned down by the requirement to hit the inflation target. And the fundamental of the Ten-Year Treasury Bond is then the expected value over the bond's lifetime of the future Federal Funds rate plus the appropriate ex ante duration risk premium.But when the economy is depressed, like now? When market appetite for short-term cash at a zero interest rate is unlimited, like now? When workers have no pricing power, and so wage inflation is subdued, like now? The Federal Reserve is not J.P. Morgan Chase. It is not a highly-leveraged financial institution that must worry about holding too much duration risk. As Glenn Rudebusch once said:Our business model here at the Fed is simple: (i) print reserve deposits that cost us 0 (OK. 0.25%/yer), (2) invest them in interest-paying bonds that we then hold to maturity, (3) PROFIT!!And the more quantitative easing the Fed undertakes and the larger is its balance sheet the larger is the amount of money the Federal Reserve makes on its portfolio, without running any risks--as long as the economy remains depressed.The Federal Reserve, you see, is unlike J.P. Morgan Chase: the Federal Reserve does print money.But, the hedge fundies say: "What if the economy recovers and starts to boom? What if inflation shoots up? The Fed could loose $500 billion on its portfolio as it moves to control inflation! Why doesn't that fear that?"The Fed does not fear that. That is what it is aiming for. The Fed is charged by law with "promot[ing] effectively the goals of maximum employment, stable prices, and moderate long term interest rates". A full-employment economy is not something to be feared but something to be welcomed. And a $500 billion mark-to-market loss on its current portfolio? The Fed has given $500 billion to the Treasury, as a present, over the past decade. It is not a profit-making private bank. It is a central bank charged with "promot[ing] effectively the goals of maximum employment, stable prices, and moderate long term interest rates"."But," the hedgies say, "George Soros! The Bank of England held the pound sterling away from fundamentals in 1992, and George Soros bet against them and they could not maintain the parity and George Soros took them for $2 billion! Why aren't we doing the same?" Ah. But George Soros took $2 billion from the Bank of England because its political masters told it to stand down: "We will not," they said, "defend the ERM pound parity at the price of bringing on a deep recession and mass unemployment." Who do the hedgies imagine are the Fed's political masters who will tell it to shift and adopt policies that will bring on even massier unemployment? Rand Paul?There is a reason that the trade of shorting the bonds of a sovereign issuer of a global reserve currency in a depressed economy is called "the widowmaker".

Monday, December 17, 2012The Fed leverages upBen Bernanke, head of the world's largest hedge fund (aka The Federal Reserve), last week announced that next year he plans to borrow another $1 trillion dollars—on top of the $1.5 trillion he's borrowed over the past four years—in order to fund the federal government's CY 2013 deficit and give his shareholders (aka taxpayers) a profit to boot. This plan is otherwise known as QE4.

His is a unique business, since he can force the market to lend him money—he simply buys what he wants and pays for it with his "bank reserve checkbook." By the end of next year, the Fed will own $1 trillion more bonds, and the banking system will have $1 trillion more reserves, whether it wants them or not. Bernanke can also dictate the rate at which he borrows money; for the foreseeable future that will be the rate the Fed decides to pay on reserve balances held at the Fed, currently 0.25%. Those who end up with the reserves will have essentially lent the Fed money on the Fed's terms.

To be more specific: Next year, Bernanke plans to make net purchases of $540 billion of longer-term Treasuries, and $480 billion of MBS. He will fund those purchases by issuing $1.02 trillion of newly-minted bank reserves. In effect, the Fed will be swapping reserves (which are functionally equivalent to 3-mo. T-bills, the paragon of risk-free assets, but which currently pay a slightly higher rate of interest) for bonds. Since money and bank reserves are fungible, Bernanke's planned purchases should effectively cover Treasury's deficit next year, which, perhaps not coincidentally, looks to be about $1 trillion.

It's important to note here that when the Fed issues $1 trillion of bank reserves, it is NOT "printing money." That's because bank reserves are not cash and they can't be spent anywhere: like pajamas, they are only for use "in house," since they are always kept at the Fed. Bank reserves do have a unique feature, of course, that other short-term assets don't: they can be used by banks to create new money, and in fact, acquiring more reserves is the only way that banks can increase their lending, because banks need reserves to back their deposits. Since banks now hold $1.6 trillion of reserves, of which only $0.1 trillion is required to back current deposits, banks already have an almost unlimited ability to make new loans and thereby expand the money supply. A year from now they will have an even more unlimited ability to do so.

That banks haven't yet engaged in a massive expansion of lending activity and the money supply is a testament only to the risk-averse nature of bank management and the risk-averse nature of the public, which now holds $6.5 trillion of bank savings deposits (up 64% in the past four years) paying almost nothing. As the above chart shows, in recent years the M2 measure of money supply has grown only slightly faster than its long-term average.

To put it another way: The Fed's massive provision of reserves to the banking system has not resulted in an equally large increase in inflation because the world's demand for money (cash, bank deposits, and cash equivalents like bank reserves and T-bills) has been very strong. Banks, in short, have been content to sit on $1.5 trillion of "excess" reserves because they worry that making more loans and increasing deposits might be a lot riskier.

The rationale for hedge funds is to exploit arbitrage opportunities, buying one thing and selling or borrowing another. Even small differences in prices can become lucrative, thanks to the use of lots of leverage. If done successfully, arbitrage can contribute to market efficiency, which in turn can contribute to the health of an economy. Whether the Fed will accomplish the same thing with QE4, however, is an open question. Will banks lend a lot more next year, even though they have an essentially unlimited capacity to lend today? Will increased bank lending fuel genuine economic growth, or will it just fuel more speculation? No one knows. We are in uncharted waters; what the Fed is doing today has never been done before.

When faced with issues of daunting complexity and with little or no guidance from the past, one can only begin by trying to reduce things to their simplest form. Here's what I think is a simplified description of what the Fed is planning: Next year the Fed will be purchasing a total of $1 trillion of 10-yr Treasuries and current coupon MBS. 10-yr Treasuries currently yield 1.75%, and current coupon MBS about 2.25%, so the Fed will earn roughly 2.0% on its purchases, while paying out 0.25% on the reserves it creates to buy those bonds, for a net spread of 1.75%. By the end of next year, the Fed will be raking in $17.5 billion per year in profits on their $1 trillion swap, and that will make the Fed the envy of all other hedge fund managers.

These profits, of course, are automatically remitted by the Fed to Treasury. Happily for taxpayers, those profits will completely offset Treasury's cost of borrowing, at least for the next several years. Here's the math, also in simplified form: First, let's assume that Treasury is funding its deficit with 7-yr Treasuries (that's a decent approximation, since last year they told us that they were going to lengthen the average maturity of outstanding Treasuries, which at the time was about six years). The yield on 7-yr Treasuries is currently about 1.25%, so Treasury will pay 1.25% on $1 trillion, and receive back from the Fed 1.75%, leaving a profit of about 0.5%, or $5 billion. Bottom line, we will all benefit from next year's deficit financing! (Note that the key to the profit is the Fed's decision to buy lots of MBS, which yield more than Treasuries of similar maturity.)

A real-world hedge fund attempting to do the same thing would run up against the reality of mark-to-market accounting rules. If interest rates on the bonds it buys rise, the mark-to-market losses on the bonds could easily wipe out the interest it's receiving, threaten margin calls and ultimately result in insolvency. For example, a 1 percentage point rise in the yield on 7-yr Treasuries would result in a 6.7% decline in their price, thereby wiping out over 5 years' worth of coupon payments. Mortgage-backed securities could fall in price by even more. A hedge fund would also be exposed to the risk that its borrowing costs could rise, thus narrowing or even eliminating the net interest spread it's earning.

Happily, Bernanke doesn't have to worry about any of this, since he doesn't have to mark his bonds to market, and he can keep his borrowing costs below the current yield on his portfolio for at least the next 2 or 3 years, given the FOMC's recent guidance (i.e., it won't start tightening until the unemployment rate falls to 6.5%, short-term inflation expectations exceed 2.5%, and/or long-term inflation expectations become unanchored). And of course, the Fed can always make the interest payments on its borrowings because its "bank reserve checkbook" is effectively bottomless.

If this all sounds too good to be true, it is. The Fed may not face the risks that a typical hedge fund does, but that doesn't mean the Fed is not taking on a huge amount of risk at taxpayers' and citizens' expense. Although the Fed need never face insolvency, if mark to market losses got really bad, they could lose their credibility and with that the value of the dollar could be seriously at risk. The Fed's losses might become direct obligations of Treasury, or they might be inflicted on taxpayers and citizens via the sinister "inflation tax." The Fed could eventually repay its borrowings with devalued dollars, leaving the rest of us with deflated balance sheets and deflated incomes. Meanwhile, by allowing Treasury to borrow trillions at no cost, the Fed is acting as an obstacle to badly needed deficit reduction.

Although it may seem paradoxical, the biggest risk we all face as a result of the Fed's unprecedented experiment in quantitative easing is the return of confidence and the decline of risk aversion. If there comes a time when banks no longer want to hold trillions of dollars worth of excess bank reserves for whatever reason (e.g., the interest rate the Fed is paying is no longer attractive, or the banks feel comfortable using their reserves to ramp up lending, or the public no longer wants to keep many of trillions of dollars in bank savings deposits), that is when things will get "interesting."

More confidence would mean less demand for cash and cash equivalents, and that in turn would mean that a virtual flood of money could try to exit banks (e.g., as people withdraw their savings deposits, and/or borrow more from their banks). If the public attempted to shift trillions in cash into housing, stocks, gold, or other currencies, the consequences would likely be seen in sharply rising prices and higher inflation. Moreover, higher inflation would almost certainly lead to higher interest rates, which in turn would exacerbate the Fed’s mark to market problem and possibly accelerate the whole process. And of course, higher interest rates will result in significantly higher borrowing costs to Treasury, although this will be mitigated to some extent by Treasury's efforts to extend the average maturity of its borrowings.

The Fed reasons that it could deal with declining risk aversion by selling bonds (i.e., reducing bank reserves), not reinvesting principal, and by raising the rate it pays on bank reserves. But it’s not hard to see how things could get out of control: higher rates on bank reserves would likely accelerate the rise in market yields and the mark to market losses on the Fed’s bond holdings, at the same time as its spread eroded. In the meantime, the more bank reserves the Fed creates, the harder it will be to avoid an unhappy outcome.

It’s ironic that the Fed is trying, with QE4, to accomplish the very thing that could be its own undoing. Trying, that is, to encourage more confidence, more lending, more borrowing, more investment, and higher prices for risk assets.

It’s no wonder that the market remains so risk-averse, since this is hardly a comforting position we're in. For now, that is probably a good thing. But in the wake of the election results and the Fed's latest decision, I am less optimistic today than I have been for several years.

"It’s no wonder that the market remains so risk-averse, since this is hardly a comforting position we're in. For now, that is probably a good thing. But in the wake of the election results and the Fed's latest decision, I am less optimistic today than I have been for several years. "

"less optimistic" & "for several years".

Wow.

Now if Wesbury starts to show signs of cold feet - it's money under the mattress time.

From David Gordon (known to several of us here as a very, very shrewd player of the stock market) I am unable to include the attached file.

*Printing Money*"*The Federal Reserve is printing money*."

No statement could be less truthful. The Federal Reserve (Fed) is not, andhas not been, “printing money” as defined as an acceleration in M2 or moneysupply. Just check the facts. For the first quarter of 2013 the Fedpurchased $277.5 billion in securities (net) as their security portfolioexpanded from $2.660 trillion to $2.937 trillion. A review of post-wareconomic history would lead to a logical assumption that the money supply(M2) would respond upward to this massive infusion of reserves into thebanking system. The reality is just the opposite...

Please see pdf file attached for complete commentary by Lacy Hunt.

Internet friend Tom, a serious student of Austrian economics replies;

When he says "No statement could be less truthful" he is overstating hiscase a bit. Yes, most of the security buying has gone directly into bankreserves, but note this sentence in the article:

<The money supply indeed went up (35%) but not in proportion to theincrease in the monetary base (249%). Presently, the year- over- yearexpansion of M2 is only 6.8%, which is nearly identical to itsyear-over-year growth rate in March of 2008 before the Fed decided to “helpout the economy”.>

This is still quite a lot of monetary growth. Boom period growth rates weresimilar and that was sufficient to generate the housing bubble and make thebust inevitable. The Fed is seeking to continue that inflation rate and theresult will be further malinvestment and, eventually, another bust. If M2had grown at the rate by which the Fed expanded bank reserves we wouldlikely have seen a money-induced catastrophe.

The Fed is obviously trying to do something with its security purchases. Itseems, in fact, that the Fed bureaucrats really do believe they can somehowimprove the economy by injecting additional bank reserves and manipulatinginterest rates. Notice, too, that the Bank of Japan thinks it can produceprice inflation through the same means. Whatever its direct effects, theFed is trying to centrally manage the US capital markets. The result willbe lots of relative price distortions leading to malinvestment and,eventually, another bust.

First, two comments on the David M Gordon (DMG) post above in this thread: a) By saying trillions of quantitative easing did not expand M2 to me is pointing out what a lousy, incomplete measurement M2 is of the money supply, hence the terms M3, M4, MZM, L, etc. b) As I have rebutted previously, Milton Friedman said MV=PQ. If the extra money is all parked and uncirculated as bank reserves with zero velocity, then prices don't change with output stagnant. But what are those bank reserves other than money that presumably has the potential to be circulated and multiplied. The final scorecard of the damage done by these policies is not yet known. -----------------

Perhaps David Malpass was reading the discussions on the forum when he wrote the following piece for the WSJ today. The Fed's manipulations create distortions in the economy and distortions keep resources from moving to their best use. The proof is in the dismal results of these policies.

David Malpass: Fed Policy Is a Drag on RecoveryThe stock market is soaring. Yet real median income has fallen 5%, unheard of for a recovery.

By DAVID MALPASS

Former Federal Reserve Chairman Paul Volcker said in a speech to the Economic Club of New York on Wednesday that the Fed should not be asked to "accommodate misguided fiscal policies" and "will inevitably fall short." He outlined a preferred monetary policy based on orthodox central banking aimed at a stable currency in order to maximize employment. "Credibility is an enormous asset," he said. "Once earned, it must not be frittered away." Those words are true and timely.

As this month's stock and bond market gyrations showed, traders are obsessively focused on every nuance of the Fed's monetary plans. Billions of dollars are at stake for Wall Street, which profits mightily from the Fed's bond buying and cheap credit.

The problem is the broader economy's poor performance in growth and jobs. The Fed, which was once a key proponent of market-based economic policies, has forced U.S. interest rates to near zero for four-and-a-half years with no plans to stop. It has bought nearly $3 trillion in bonds, with the express goal of channeling credit to the government, government-owned enterprises and large corporations in the hope that this will boost employment.

The Fed's bond-market interventions probably helped during the 2008 crisis when markets had frozen, but after that the economy would have done much better without them. Recoveries are normally fast and broad once markets are allowed to clear and begin operating. Quarterly growth topped 9% in 1983 after a deep recession and 7% in 1996 leading into President Clinton's re-election. Interest rates were high, yet median incomes were rising sharply.

Growth in the current recovery only rose above 4% once, in the fourth quarter of 2011, and averaged just 2% per year in its first four years versus 5% in the same period of the 1980s recovery, 3.2% in the 1990s recovery and 2.9% in the 2000s recovery. The underperformance over the past four years translates into more than three million jobs that should have been created but weren't, an economic disaster that lowered real median incomes by 5%.

The disastrous state of affairs was rationalized as a "new normal" following the Great Recession, but the reality is that poor policy choices hurt growth. Tax-and-spend policies sapped investment, and the Fed's low rates and bond purchases damaged markets, hurt savers and channeled credit to the government at the expense of job creators. It's a zero-sum process that should be stopped because of the bad effect on growth and jobs.

Incredibly, as Fed Chairman Ben Bernanke alluded to in his May 22 congressional testimony, the Fed is now angling to create a semi-permanent control dial with which the Fed can increase its $85 billion in monthly bond purchases when growth slows and reduce them if growth ever speeds up. This creates maximum uncertainty for the private sector, giving an advantage to traders, the government and the rich but hurting growth and long-term investors.

Washington thrives on the impression that the economy and markets are dependent on the Federal Reserve and deficit spending. This is the wrong lesson. More likely, past government excesses—trillions added to the national debt and the Fed's liabilities—lowered the growth rate. The economy and markets would adjust and be better off without them.

One line of Fed criticism has emphasized money printing and an inflation risk. This is off target and, with inflation low, gives the Fed an opening to keep going. When the Fed buys bonds, it pays for them with liabilities to banks called excess reserves. There's no creation of new money in the private sector. The M2 money supply, the measure of bank deposits often used by monetarists to anticipate inflation, is unaffected. Private-sector credit grew only 0.8% from the end of 2008 through the end of 2012, whereas credit to the government grew 58%.

Rather than money printing that turns into cash, the excess reserves are, in effect, an IOU from the Fed. Interest is paid on them and they aren't spent or used by banks to increase lending. This distinguishes current policy from the inflationary 1960s and 1970s, when the Fed created reserves that banks used as backing for multiple loans and rapid growth in private-sector credit.

The stronger criticism is that the Fed's policy is contractionary, harming growth. The Fed's intention is that the low bond rates it provides the government will spill over to big corporations and banks, who in turn will help the little guy. This trickle-down monetary policy has contributed to very fast growth in corporate profits, part of the explanation for the record stock market, but also to weak GDP growth and declining middle-class incomes. The extra credit the Fed channeled to government and big corporations meant less credit elsewhere in the economy, a contractionary influence since most new jobs come from small businesses.

Still, three important developments may lift the economy despite the Fed, forcing it to taper its bond purchases and allow the recovery to accelerate. First, the Jan. 2 tax bill removed the risk of tax rate increases—on income, dividends, estates and the alternative minimum tax—that depressed growth in 2010-12. Second, most businesses are encouraged by the sequester and the idea of the government tackling spending, however clumsily. Third, private credit has started to grow, helped by thousands of new nonbank lenders. Total credit grew at a 5.6% annual rate in the fourth quarter of 2012 after contracting for much of 2009-12.

But whether the economy turns up or not, it should be clear that the Fed's unprecedented and far-reaching monetary policy has been a drag, not a stimulus.

Mr. Malpass, a deputy assistant Treasury secretary and legislative manager for the 1986 Tax Reform Act in the Reagan administration, is president of Encima Global LLC.

State banking regulators are scrutinizing companies that let people buy and sell virtual currencies such as bitcoin, and some are looking at requiring costly licenses, according to people familiar with the efforts.

It is the latest sign that the freewheeling world of virtual currencies is about to get less free. Just this week, prosecutors claimed to have exposed a $6 billion money-laundering ring that allegedly relied on them.

Bitcoin enthusiasts say the currency derives its value from its limited supply and the support of the people using it.

"Virtual" currencies can be used just like dollars among people who agree to accept them. One big difference is that they aren't backed by a government. Instead, bitcoin enthusiasts say, the currency derives its value from its limited supply and the support of the people using it.

In the past three months, the Treasury Department, prosecutors and now state regulators have taken aim at virtual-currency exchanges, telling them they must follow traditional rules aimed at thwarting money-laundering. The lightly regulated currencies have caught the attention of people who allegedly use some of them to mask profits from illegal activities.

Companies using virtual currencies said they welcome the regulatory push because it helps legitimize the practice and build trust with users and investors. But new rules could also make the systems more cumbersome, taking away some advantages, currency experts say. Bitcoin can sometimes be cheaper to use than regular currencies, for instance, because there are fewer "transaction fees" that can take a bite out of regular credit-card transactions.

MoneyBeat

Guide to Virtual Currencies"There is definitely a lot of scrambling that is going on in the industry," says Carol Van Cleef, a lawyer at Patton Boggs LLP in Washington who represents clients in bitcoin ventures.

The four-year-old bitcoin payment system is among the most popular of the new methods. The price of a bitcoin on the Tokyo-based Mt. Gox, a primary exchange, was about $130 Friday. That compares with roughly $50 in mid-March and a high of $230 in April.

The new scrutiny comes at the same time federal regulators are attempting to rein in illegal activities made easier by virtual currencies. The Financial Crimes Enforcement Network, or FinCEN, a unit of the Treasury Department, in March issued guidelines that said virtual currency exchanges are subject to the same comprehensive anti-money-laundering requirements as traditional money-transmission businesses such as Western Union Co. WU -0.49% and encouraged them to register with the agency.

"This is definitely on our radar. We are becoming aware of more and more businesses that may need to be licensed," said Daniel Wood, assistant general counsel in the Texas Department of Banking.

Texas is one of 48 states that require companies to obtain money-transmission licenses to operate. South Carolina and Montana don't have such rules.

New York bank regulators said they are also discussing the issues with virtual currency exchanges operating in the state. "We are not only looking at whether virtual currency companies should be licensed as money transmitters," says Benjamin Lawsky, superintendent of the New York Department of Financial Services, but also looking at money-transmission rules "to see whether they need to be modernized" to address the "potential dangers raised by virtual currencies."

The federal crackdown intensified Tuesday when prosecutors accused Costa Rica-based Liberty Reserve of operating a $6 billion money-laundering ring that was tied to an Internet-based currency. It marked the first time authorities have invoked the 2001 Patriot Act against a virtual currency.

Liberty Reserve couldn't be reached late Friday for comment. Its website, libertyreserve.com, says the site has been seized by the "United States Global Illicit Financial Team."

The criminal indictment was filed in U.S. District Court in the Southern District of New York. The company and seven of its principals and employees were charged with money-laundering and operating an unlicensed money-transmitting business.

The Liberty Reserve charges came two weeks after authorities froze an account tied to the largest bitcoin exchange. The Department of Homeland Security accused Mt. Gox and one of its subsidiaries of conducting transactions "as part of an unlicensed money service business."

Mt. Gox said Thursday it is beefing up its identification process for users. Among other things, the exchange, which says it handles 80% of all bitcoin trading, said accounts must be verified with a valid photo ID and proof of residence.

Companies that register with FinCEN as money transmitters must hire a chief compliance officer, implement an anti-money-laundering program and alert authorities if they believe a transaction might be tied to suspicious activity.

"If you are operating in this industry, you have to recognize it is regulated," says Chris Daniel, a lawyer specializing in payments at Paul Hastings LLP, an Atlanta firm.

Compliance isn't always easy at the state level, executives said. Each state has different requirements, according to people familiar with the process.

State money-transmission licenses can be costly. In Texas, companies seeking a license must provide a surety bond of between $300,000 and $2 million, depending on transaction volume, said Mr. Wood of the state's banking department.

By Constantine von Hoffman / MoneyWatch/ May 31, 2013, 12:07 PM Wealth of most Americans down 55% since recession

(MoneyWatch) Increasing housing prices and the stock market''s posting all-time highs haven't helped the plight most Americans. The average U.S. household has recovered only 45 percent of the wealth they lost during the recession, according to a report released yesterday from the Federal Reserve Bank of St. Louis.

This finding is a very different picture than one painted in a report earlier this year by the Fed that calculated Americans as a whole had regained 91 percent of their losses. The writers of the report released yesterday point out that the earlier number is based on aggregate household-net-worth data. However, this isn't adjusted for inflation, population growth or the nature of the wealth. Further, they say much of recovery in net worth is because of the stock market, which means most of the improvement has been a boon only to wealthy families.

"Clearly, the 91 percent recovery of wealth losses portrayed by the aggregate nominal measure paints a different picture than the 45 percent recovery of wealth losses indicated by the average inflation-adjusted household measure," the report said. "Considering the uneven recovery of wealth across households, a conclusion that the financial damage of the crisis and recession largely has been repaired is not justified," the researchers said.

Household wealth plunged $16 trillion from the top of the real estate bubble in the third quarter of 2007 to the bottom of the bust in the first quarter of 2009. By the last three months of 2012, American households as a group had regained $14.7 trillion.

The report says almost two-thirds of the increase in aggregate household wealth is due to rising stock prices. This has disproportionately benefited the richest households: About 80 percent of stocks are held by the wealthiest 10 percent of the population.

Much of the total wealth of middle- and lower-income households is based on home values, not stocks. Even though home prices have increased nearly 11 percent in the past year, they remain about 30 percent below their peak.

While Americans continue to pay down their debt, the report says debt levels and problems with rebuilding net worth are the main reasons the recovery has been so slow. Also, the people who bore the brunt of the recession through job losses and reduced income were the ones who had borrowed the most.

The report found that members of the households that suffered the most financially were less educated, relatively young or black or Hispanic, or some combination of these factors. Those families tended to have low savings and high debt, with much of their wealth based on housing.

The poorest households have felt the sharpest losses as a consequence of the recession: "While many Americans lost wealth during the Great Recession, younger, less-educated and nonwhite families lost the greatest percentage of their wealth," James Bullard, president of the St. Louis Fed, said in a statement. "Household deleveraging, or paying down debt, has played a key role in the recent recession and the slow recovery."

So far this year, the Plow Horse US economy has accelerated a little bit from2010-2012, the S&amp;P 500 is up 16%, interest rates have risen, and gold is off17%. As our readers know, this is exactly what we&rsquo;ve been forecasting.

Despite this success, we have had one big miss: inflation. Consumer prices &ndash;including food and energy &ndash; are up a mere 1.1% from a year ago. We&rsquo;venever been in the hyperinflation camp &ndash; that&rsquo;s why we&rsquo;ve beenbearish on gold these past few years &ndash; but, we never expected such benigninflation.

We think gold had priced in 10% to 12% inflation, and we expected 3 or 4 or 5%,that&rsquo;s why we were bearish on the yellow metal. And, at the same time wethought the Federal Reserve&rsquo;s forecast of 1.5 to 2% inflation was too low. So,even though we have been right on gold, our inflation estimates have been too high&ndash; just like the Fed&rsquo;s.

The &ldquo;hyper-inflationistas&rdquo; have been overly focused on the size of theFed&rsquo;s balance sheet, failing to recognize that it&rsquo;s mostly due to asurge in excess bank reserves. The M2 measure of money has continued to grow around6% per year, well below the growth in the monetary base, Quantitative easing has notonly been unnecessary but has also made monetary policy more opaque, leading some tofalsely expect hyperinflation.

We expect to look back in a few years and see that the present low readings were thelowest inflation would get. And we also believe it will become apparent that weakmonetary velocity is the reason for current low inflation.

The expansion of government over the past several years, both in measurable termslike spending relative to GDP as well as hard to measure ways, such as theregulatory costs of Obamacare, are suppressing the economy&rsquo;s potential growthin a way that slows the circulation of money. As a result, for any given amount ofmoney, we get less nominal GDP, including less real growth and less inflation.

Another issue might be the Fed&rsquo;s decision to pay banks interest on excessreserves. This new policy was implemented in late 2008. It could mean that a lowfederal funds rate is not as &ldquo;stimulative&rdquo; as the historical recordsuggests it should be.

Yet another issue may be simple &ldquo;inflation inertia.&rdquo; It sometimes takesmany years for loose money to generate higher inflation, especially when the publictrusts the Fed to keep inflation low. For example, back in the 1950s, the federalfunds rate averaged about 2% even as nominal GDP growth averaged 6 - 7%. But withthe Bretton-Woods monetary system&rsquo;s gold peg firmly entrenched, inflationaveraged 2.2% for the decade. It wasn&rsquo;t until the late 1960s that inflationbecame a problem.

If a similar pattern holds, we can expect inflation to rise from the current low,but not accelerate rapidly anytime soon.

However, in the end a price will be paid. Once unacceptably high inflation arrives,the same inertia helping hold inflation down will keep it up, so the Fed will haveto tighten even more than it wants to wrestle inflation back down.

If Chairman Bernanke soon retires, he will get high marks for keeping inflation low,but his successor will have some problems to clear up. In other words, even thoughinflation has remained low, we don&rsquo;t expect it to stay that way for long.

The Producer Price Index (PPI) rose 0.5% in May, coming in much higher than theconsensus expected 0.1%. Producer prices are up 1.7% versus a year ago.

The increase in the overall PPI was due to energy prices, which rose 1.3%, and foodprices which were up 0.6%. The &ldquo;core&rdquo; PPI, which excludes food andenergy, was up 0.1%.

Consumer goods prices were up 0.6% in May, while capital equipment prices rose 0.1%.In the past year, consumer goods prices are up 2.0% while capital equipment pricesare up 0.9%.

Core intermediate goods prices were down 0.4% in May and are down 0.2% versus a yearago. Core crude prices fell 2.3% in May, and are down 6.3% versus a year ago.

Implications: Producer prices rebounded 0.5% in May, easily beating consensusexpectations. Even with this rebound, prices are up only 1.7% from a year ago. Giventhe loose stance of monetary policy, higher inflation is eventually coming, but itisn't here yet. The main culprits behind the wholesale price rise were energy andfood prices which rose 1.3% and 0.6% respectively after falling 2.5% and 0.8% inApril. Still, energy prices are down 17.3% at an annualized rate over the past threemonths. &ldquo;Core&rdquo; prices, which exclude food and energy and which theFederal Reserve claims are more important than the overall number, were up 0.1% inMay and are up 1.7% versus a year ago. Some analysts may suggest that with theoverall and &ldquo;core&rdquo; PPI only up 1.7% from last year that the FederalReserve has room to continue its latest round of bond buying. We think this is amistake, and it seems like some more members of the FOMC are starting to think thesame thing. Core inflation is likely to continue growing and, despite projections ofbumper US crop yields, food inflation should continue moving upward given recentimprovement in foreign economies. Monetary policy is loose enough already. Theproblems that ail the economy are fiscal and regulatory in nature. Adding even moreexcess reserves to the banking system is not going to boost economic growth.

The Consumer Price Index (CPI) increased 0.1% in May, coming in below the consensus expected gain of 0.2%. The CPI is up 1.4% versus a year ago.“Cash” inflation (which excludes the government’s estimate of what homeowners would charge themselves for rent) was up 0.1% in May and is up 1.2% in the past year.The gain in the CPI in May was led by rent (+0.2%) and energy (+0.4%). Food prices were down 0.1%. The “core” CPI, which excludes food and energy, was up 0.2% in May, exactly as the consensus expected. Core prices are up 1.7% versus a year ago.Real average hourly earnings – the cash earnings of all employees, adjusted for inflation – were down 0.2% in May, but are up 0.5% in the past year. Real weekly earnings are up 0.9% in the past year.

Implications: For now, all continues to be quiet on the inflation front. Consumer prices rose a tepid 0.1% in May and are only up 1.4% from a year ago. The slight rise in May was due to rent (both actual rent and owners’ equivalent rent) as well as energy costs. Food and medical care each declined 0.1%. “Core” prices, which exclude food and energy, were up 0.2% in May and are up 1.7% from a year ago. Neither overall nor core price gains in the past year set off alarm bells. Instead, they suggest the Federal Reserve’s preferred measure of inflation, the PCE deflator (which usually runs a ¼ point below the CPI) will remain below the Fed’s target of 2%. We don’t expect this to last. Inflation probably bottomed in April when it was up only 1.1% from the prior year, and will be noticeably higher a year from now. However, for the Fed, the key measure of inflation is its own forecast of future inflation, which we see released tomorrow with the FOMC statement. So, even if inflation goes to roughly 3% in 2014, as long as the Fed projects the rise to be temporary it will not react to that inflation alone by raising short-term interest rates. The Fed is more focused on the labor market and, we believe, is willing to let inflation exceed its long-term target of 2% for a prolonged period of time in order to get the unemployment rate down. The worst news in today’s report was that “real” (inflation-adjusted) average hourly earnings declined 0.2% in May, although they are still up 0.5% in the past year. Given today’s news it looks like “real” (inflation-adjusted) consumer spending is growing at a 2.5% annual rate in Q2, consistent with our forecast of 2.5% real GDP growth.

As I have commented many times around here, gold dropped hard and fast in the late 70s when Volcker increased interest rates. As I have predicted here, when rates go up, gold/silver will go down. That is what we are seeing now.

Gents, when the facts prove us wrong we should change our opinion. I think Scott Grannis has given us a level of analysis superior to what we were saying with regard to money supply (M2) and bank reserves-- data about the latter being what was scaring the beejeezus out of us. The debt as a percentage of GDP has dropped from 11 or 12% to something under 6% now (i.e. about as high as the peak of the deficit under Reagan) and federal spending as a % of GDP has dropped from 25% to something like 23%. Are 6% and 23% too high? Destructive? ABSOLUTELY! AND they are not the apocalyptic numbers of but a year or two ago.

The Producer Price Index (PPI) rose 0.8% in June, coming in higher than the consensus expected 0.5%. Producer prices are up 2.5% versus a year ago.The increase in the overall PPI was mostly due to energy prices, which rose 2.9%. Food prices increased 0.2%, the same as the “core” PPI, which excludes food and energy.Consumer goods prices were up 1.1% in June, while capital equipment prices rose 0.1%. In the past year, consumer goods prices are up 3.0% while capital equipment prices are up 0.9%.Core intermediate goods prices were up 0.1% in June and are up 0.9% versus a year ago. Core crude prices rose 0.1% in June, but are down 2.2% versus a year ago.Implications: Producer prices spiked 0.8% higher in June on top of a large gain in May. Most of the gains in the past two months have been due to energy. It remains to be seen whether this is the start of the persistently higher inflation trend that we think is inevitable given the loose stance of monetary policy. Overall producer prices are up 2.5% in the past year while “core” prices, which exclude food and energy are up 1.7%. Some analysts may suggest that with the “core” PPI only up 1.7% from last year that the Federal Reserve has room to continue quantitative easing at a pace of $85 billion per month. We think this is a mistake, and, given the minutes from the most recent Fed meeting, it seems like more members of the FOMC are starting to think the same thing. Monetary policy is loose enough already. The problems that ail the economy are fiscal and regulatory in nature; adding even more excess reserves to the banking system is not going to boost economic growth. In other recent inflation news, trade prices were subdued in June, with import prices down 0.2% for the month and up only 0.2% from a year ago. Import prices excluding petroleum were down 0.3% in June and down 0.5% from a year ago. Export prices slipped 0.1% in June, but are up 0.8% from a year ago. The small climb in export prices since last year is all due to food; ex-agriculture export prices are down 0.3% from a year ago. For the labor market, new claims for unemployment insurance were up 16,000 last week to 360,000. Continuing claims were up 24,000 to 2.98 million. However, there is nothing unusual about a temporary increase in claims around July 4 and we expect a decline next week. Plugging these data into our employment models generates a very early estimate of a 163,000 gain in nonfarm payrolls in July. More plow horse.

A federal judge has upheld a verdict that strips a Pennsylvania family of their grandfather’s gold coins — worth an estimated $80 million — and has ordered ownership transferred to the US government.

Judge Legrome Davis of the Eastern District Court of Pennsylvania affirmed a 2011 jury decision that a box of 1933 Saint-Gaudens double eagle coins discovered by the family of Israel Switt, a deceased dealer and collector, is the property of the United States.

In the midst of the Great Depression, then-President Franklin Roosevelt ordered that America’s supply of double eagles manufactured at the Philadelphia Mint be destroyed and melted into gold bars. Of the 445,500 or so coins created, though, some managed to escape the kiln and ended up into the hands of collectors. In 2003, Switt’s family opened a safe deposit back that their grandfather kept, revealing 10 coins among that turned out to be among the world’s most valuable collectables in the currency realm today.

Switt’s descendants, the Langbords, thought the coins had been gifted to their grandfather years earlier by Mint cashier George McCann and took the coins to the Mint to have their authenticity verified, but the government quickly took hold of the items and refused to relinquish the find to the family. The Langbords responded with a lawsuit that ended last year in a victory for the feds.

Because the government ordered the destruction of their entire supply of coins decades earlier, the court found that Switt’s family was illegally in possession of the stash. Even though they may had been presented to the dealer by a Philadelphia Mint staffer, Judge Davis agrees with last year’s ruling that Mr. McCann broke the law.

"The coins in question were not lawfully removed from the United States Mint,” the judge rules.

Despite this decision, though, the attorney representing Switt’s family says the government has no right to remove their own items and transfer property back to the state.

"This is a case that raises many novel legal questions, including the limits on the government's power to confiscate property. The Langbord family will be filing an appeal and looks forward to addressing these important issues before the 3rd Circuit," Barry Berke, an attorney for the Langbords, tells ABCNews.com

Tell me it's a sick joke: Former U.S. Treasury Secretary Lawrence Summers, the guy who tops the list of those responsible for sabotaging the world's economy, is lobbying to be the next chairman of the Federal Reserve. But no, it makes perfect sense, since Summers has long succeeded spectacularly by failing.

Why should his miserable record in the Clinton and Obama administrations hold him back from future disastrous adventures at our expense? With Ben Bernanke set to step down in January, and Obama still in deep denial over the pain and damage his former top economic adviser Summers brought to tens of millions of Americans, this darling of Wall Street has yet another shot to savage the economy.

Summers was one of the key players during the Clinton years in creating the mortgage derivative bubble that ended up costing tens of millions of Americans their homes and life savings. This is the genius who, as Clinton's Treasury secretary, supported the banking lobby's successful effort to make the sale of unregulated bundles of mortgage securities and the phony insurance swaps that backed them perfectly legal and totally unmonitored. Those are the toxic bundles that the Federal Reserve is still unloading from the banks at a cost of trillions of dollars.

But back on July 30, 1998, when he was deputy Treasury secretary, Summers assured the Senate agriculture committee that the "thriving" derivatives market was the driving force of American prosperity and would be fatally hurt by any government regulation of the sort proposed by Brooksley Born, the stunningly prescient chair of the Commodity Futures Trading Commission.

Summers opined that "the parties to these kinds of contracts are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves from fraud and counterparty insolvencies. ... "

Consider the astounding stupidity of that statement and the utter ignorance upon which it was based. One financial CEO after another has testified to not knowing how the derivatives were created and why their worth evaporated. Think of AIG and the other marketers of these products that were saved from disaster only by the injection of government funds not available to foreclosed homeowners whose mortgages were wrapped into those toxic securities.

Most of those dubious financial gimmicks were marketed by the too-big-to-fail banks made legal by another piece of legislation supported by Summers and passed a year later when Clinton tapped him to be Treasury secretary. Summers was an ardent proponent of repealing the Glass-Steagall Act that prevented the merger of highflying investment houses with traditional commercial banks entrusted with the government insured deposits of ordinary folks.

The first result of destroying that sensible barrier to too-big-to-fail banks was the creation of Citigroup as the biggest bank in the world. Threatened by its wild derivative trading, it had to be saved from bankruptcy with an infusion by taxpayers of $45 billion in U.S. government aid and a guarantee for $300 billion of its toxic assets.

Summers had condemned Glass-Steagall as an example of "archaic financial restrictions" and called instead for "allowing common ownership of banking, securities and insurance firms." A decade later, while in the Obama administration, Summers worked to prevent a return to the Glass-Steagall prohibition in the Dodd-Frank legislation.

The need to restore that reasonable banking regulation implemented by President Franklin Roosevelt in response to the Great Depression was acknowledged by bipartisan legislation introduced last week in the Senate by Elizabeth Warren, D-Mass., and John McCain, R-Ariz. "It will take a lot of tools to get rid of too-big-to-fail, but one of them ought to be that if you want to do high-stakes gambling, good on you, but you do not get access to people's checking accounts and savings accounts," Warren told Bloomberg News on Friday in urging the return of Glass-Steagall.

As opposed to Summers, who continued to insist on the wisdom of ending essential financial regulation, McCain, who had voted for the repeal, has seen the error of that decision. "Since core provisions of the Glass-Steagall Act were repealed in 1999, shattering the wall dividing commercial banks and investment banks, a culture of dangerous greed and excessive risk-taking has taken root in the banking world," the senator said in a press release Thursday announcing the legislation.

Even Sanford Weill, who headed Citigroup after pushing for the reversal of Glass-Steagall, had the good sense to acknowledge his mistake, saying in a statement a year ago: "What we should probably do is go and split up investment banking from banking. Have banks do something that's not going to risk the taxpayer dollars, that's not going to be too big to fail." Richard Parsons and John Reed, two other former high-ranking officers of Citigroup, also have called for the reinstatement of Glass-Steagall.

The question then is why Summers, the man who got it all wrong, would imagine that he could be in the running to head the Federal Reserve? Why would he ever fantasize that President Obama might turn to someone who always gets it wrong to right a still struggling economy?

Maybe because he knows Obama better than we do. After all, it was a massive infusion of Wall Street money that helped Obama get elected both times. And Wall Street, which showered Summers with almost $8 million in speaking fees and hedge fund profits during the 2008 campaign while he advised Obama, clearly would approve of this greed enabler as the next Fed chairman.

Robert Scheer is editor of TruthDig.com, where this column originally appeared. Email him atrscheer@truthdig.com. To find out more about Robert Scheer and to read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate Webpage at www.creators.com.

A silver vault that can hold 200 metric tons opens in Singapore this week to cater for increasing demand for physical precious metals among Asia’s wealthy even as the commodity leads declines this year.

The new facility is 30 percent booked at the opening, said Joshua Rotbart, precious-metals general manager at owner Malca-Amit Global Ltd. The storage will add to the firm’s five vaults at the Singapore FreePort, which are fully reserved for gold, he said in an interview. The repository can hold $128 million of silver at today’s prices. Gold is about 67 times more expensive.

Malca-Amit Global Ltd.'s security vehicles are seen at one of the company's existing vaults in Singapore, in this 2012 handout photograph released to the media on July 29, 2013. Source: Malca-Amit Global Ltd. via Bloomberg

.While silver has lost 34 percent in 2013 on concern the U.S. Federal Reserve will taper stimulus, holdings in exchange-traded products have held steady. The number of high-net-worth individuals in the Asia-Pacific region expanded 9.4 percent last year, according to Cap Gemini SA (CAP) and Royal Bank of Canada. Deutsche Bank AG, UBS (UBSN) AG and JPMorgan Chase & Co. are among banks operating metals storage in Singapore.

“Our existing vaults at the FreePort are highly secured and the rate is too expensive to store silver there,” said Rotbart, who declined to say where the new facility is sited. “We need to find a solution, and we also see a strong demand.”

Silver is the biggest loser on the Standard & Poor’s GSCI Index of 24 raw materials this year, beating declines in corn, gold and nickel. Futures, which dropped to $18.17 an ounce in June, the lowest since August 2010, traded at $19.9045 today. Gold has slumped 21 percent to $1,330.34 an ounce.

ETP Holdings

Silver holdings in ETPs stood at 19,222 tons on July 26, 1.6 percent higher this year, according to data compiled by Bloomberg. Assets in gold-backed ETPs have contracted at a record pace, shrinking 25 percent to 1,970 tons. ETPs allow investors to trade assets without taking delivery, while physical holders require storage, such as a vault.

Investors in silver are mostly private individuals, while the majority of gold holders are institutions, said Rotbart. Malca-Amit is looking to build another silver vault in Hong Kong, and may add more gold vaults in Singapore as there is no more availability in the FreePort, he said. The FreePort is located near Changi Airport in the east of the city-state.

The number of individuals with $1 million or more in investible assets climbed to 3.68 million in the Asia-Pacific region in 2012, boosted by additions in Singapore and Hong Kong, according to a report from Cap Gemini and Royal Bank of Canada. China accounted for 43 percent of worldwide economic growth from 2007 to 2012, according to an estimate from Barclays Plc.

Leased Space

UBS, Switzerland’s biggest bank, started storing gold for clients in a leased facility in Singapore, an executive said this month. JPMorgan Chase opened a bullion vault at the Singapore FreePort in 2010. Jeremy Hughes, a Deutsche Bank spokesman in Singapore, said that the bank had leased space for its 100-ton gold vault at the FreePort from Malca-Amit.

Goldman Sachs Group Inc. forecasts further declines in precious metals, with a 12-month target of $19.60 for silver and $1,175 for gold. The Fed is likely to start tapering its $85 billion a month of asset purchases in September, Jan Hatzius, the New York-based bank’s chief economist, said in a report.

About 50 percent of silver is used in industry, compared with 10 percent for gold, data from the Silver Institute and World Gold Council show. Industrial applications for silver include photography and electronics.

Malca-Amit’s vaults in Hong Kong and Singapore have a precious-metals capacity of 1,000 tons each, and the company also has facilities in New York, Zurich, Geneva, London and Bangkok. The company leases vault space to banks, and stores items for its own customers.

The Singapore government has been promoting the country as a bullion-trading hub, removing a 7 percent sales tax on investment-grade precious metals in 2012. About 2 percent of world gold demand flows through Singapore, and the government aims to increase that to as much as 15 percent.

As the U.S. emerged from recession in the summer of 2009, Janet Yellen, then president of the Federal Reserve Bank of San Francisco, took a grim view of the economy's prospects.

A WSJ analysis of more than 700 economic predictions between 2009 and 2012 by Fed policymakers shows doves, particularly Janet Yellen, have been the most prescient, while inflation hawks lagged the pack. Jon Hilsenrath explains. Photo: AP.

"I expect the pace of the recovery will be frustratingly slow," she said in a San Francisco speech. A month later, addressing fears that money flooding into the economy from the Federal Reserve would stoke inflation, Ms. Yellen said not to worry in a speech to Idaho bankers: High unemployment and the weak economy would tamp wages and prices.

Others at the Fed spoke forcefully in the other direction. Unless the central bank reversed the easy money course, Philadelphia Fed President Charles Plosser warned in December 2009, "the inflation rate is likely to rise to levels that most would consider unacceptable."

Both are contrary indicators. Run from them and run from her is my advice. She is a current Fed insider. Forecasting is far different than getting policy right.

NY Times Editorial Board, link above: "no one else can match Janet Yellen’s combination of academic credentials and policy-making experience. And no one ever confirmed to the job has come to it with as deep a grounding in both the theory and practice of monetary and regulatory policy as Ms. Yellen would bring."

Yeah, dilute the currency by $85 billion a month - these are great policies...

The dollar is stumbling as investors begin to question the relative strength of the U.S. economic recovery, which had powered a rally in the greenback in the first half of 2013.

The WSJ Dollar Index, a gauge of the dollar's exchange rate against seven of the world's most heavily traded currencies, is down 4% in the past month and hit a seven-week low on Friday. Before the selloff, which began after the dollar hit a three-year high in early July, the U.S. currency was up 8.3% for the year.

Driving the reversal: a shift in views on when the Federal Reserve might start reining in some easy-money policies that are a legacy of the financial crisis, many fund managers say. Many investors had piled into the dollar earlier this year on the belief that robust growth in the U.S. would lead the Fed to scale back its bond-purchase program, which has been pumping $85 billion into the economy each month, in the fall. Not only would a receding flood of dollars raise the greenback's value, the positive signal it would send about the U.S. economy would give the dollar additional fuel by attracting money flows from outside the U.S., analysts say.

However, disappointing economic data, mainly weaker-than-expected jobs growth and tepid retail sales, have prompted some currency investors to back away from bullish dollar bets that were based on the Fed reducing—or "tapering"—bond purchases in September, well before other major central banks would be ready to start tightening monetary policy.

Investors have slashed bets on a rising dollar by 49%, to $21.7 billion, since late May. Then, the value of wagers hit its highest level since at least 2007, when the U.S. Commodity Futures Trading Commission first started to track the data. The number reflects investors' net position in the futures market.

"We are at this turning point where investors aren't sure whether this strong-dollar thesis is really going to hold up," says Samir Sheldenkar, an investment partner at Harmonic Capital Partners LLP, a London hedge fund with $1.2 billion under management. The fund recently pared back bets on a stronger dollar because the rate of job growth in the U.S., which the Fed is closely watching as it mulls a pullback, hasn't picked up since the start of the year.

Now, investors like Mr. Sheldenkar say tapering is more likely to happen in December or even later.

The Fed has said it won't start pulling back on bond purchases until the U.S. labor market sees "substantial" improvement. In July, the U.S. economy added 162,000 jobs, less than economists had expected.

At the same time, there are signs that Europe's year-and-a-half-long recession is coming to an end, enhancing the allure of the euro. As well, fears that a slowdown in China would drag down the global economy appear overblown for now, a factor that could revive the appeal of riskier assets such as emerging-market currencies.

Although the selloff in the dollar is in its early stages, the implications could be wide-ranging. For example, in the longer term, a weaker dollar could bolster corporate earnings, as multinational companies find that profits made outside the U.S. are worth more when translated into dollars.

Currency investors are focusing on the next jobs report, slated for release on Sept. 6, because they believe it is likely to dictate the Fed's next move at its Sept. 17-18 meeting. If the Fed doesn't announce tapering then, the dollar could face a bumpy ride lower, analysts and investors say. Conversely, if the central bank says it will cut back on the stimulus, the dollar rally could resume.

"The trade is no slam dunk, and the dollar has gone down a lot," says Adrian Lee, president of Adrian Lee & Partners, which oversees $6 billion of currency and fixed-income investments. "But it's only a matter of time before it will turn higher again."

The Fed is unique among its counterparts in Japan, the U.K., Australia and the euro zone in that it has openly considered a policy of withdrawing monetary stimulus, Mr. Lee says. That alone is supportive of the dollar.

The relative health of the U.S. economy will continue to remain a lure, investors say. The International Monetary Fund pegs U.S. growth this year at 1.9%, compared with an average of 1.2% for all developed economies.

"What's the most attractive currency in the room? To investors, it's clear it's the dollar," says Akshay Krishnan, a senior analyst at Stenham Asset Management in London. "The underlying view is that the U.S. economy is recovering and growing at a faster pace than other parts of the world."

Still, there are warning signs for the dollar. Yields on Treasurys rose sharply starting in May—for reasons also related to possible Fed tapering—with the 10-year yield hitting a nearly two-year high of 2.718% on July 5. The soaring bond yields sparked record outflows in emerging markets, sending investors back to the refuge of the dollar. But the drop in bond prices, which move in the opposite direction to yields, has since abated. The yield on the 10-year Treasury was 2.58% Friday.

Christopher Brandon, a managing director with Rhicon Currency Management (Pte.) Ltd., believes Treasury yields will have to rise above 3% before another upswing in the dollar is triggered. He says that is unlikely until the Fed actually starts tapering. "The market found that it got a little bit ahead of itself" in its optimism on the dollar, said Mr. Brandon, who manages about $500 million in Singapore.

"The dollar needs confirmation that this economic divergence is indeed playing out," Mr. Jen said. "We need to see better data in the U.S., and we need to see weak data in the rest of the world. If this thesis is undermined, then the dollar will struggle."

The bill would create a 12-member, bipartisan commission that would objectively review the Fed's performance in terms of output, employment, prices and financial stability over its first 100 years. The commission would also study what legislative mandate the Fed should follow to best promote economic growth and opportunity. ...I believe the best way to grow jobs and the economy is for the Fed to focus on preserving the purchasing power of the dollar, as reflected in the Sound Dollar Act, which I introduced last year. Stanford economist John B. Taylor shares this view of the Fed's ideal policy. However, since 1977 the Fed has operated under a dual mandate: to maintain stable prices and to maximize employment.

How good is your memory? Not many people today have personal memories of the Great Depression some 80 years ago, when thousands of banks closed. It would be natural, you'd think, to have a burning memory of what happened just five years ago when the U.S. banking system was on the brink of a similar collapse. The housing bubble burst. Lehman Brothers went bankrupt. Banks pulled back on lending, investors avoided new bonds and everyone seemed to be stockpiling cash. The economy started to contract by 5 percent to 6 percent annually. Trillions of dollars were knocked off the value of U.S. companies. The public and financial authorities had reason to believe nothing much could be done to avert a rerun of the Great Depression.

George Santayana (and before him the 18th century British philosopher and politician Edmund Burke) had history in mind when he observed that those who can't remember the past are condemned to repeat it. Five years hardly qualifies as "history," so it is unnerving that even supposedly well-informed people have forgotten how we got out of the mess. Last year, for example, the House of Representatives followed the lead of former Texas Republican Rep. Ron Paul (now taken up by his son, Kentucky Sen. Rand Paul) in passing a motion for an audit of the Federal Reserve, as if the Fed had been a cause of our problems.

On the contrary, the Federal Reserve was quite simply our last hope. It was the chairman of the Federal Reserve Ben Bernanke who came to the rescue. Bernanke, a former Princeton professor, was a scholar of the Great Depression, a background that proved critical. Right from his start in 2006, he demonstrated a tough independence. Unconvinced of inflation predictions in 2007, he refused to continue ratcheting up interest rates – and he was proved right. When the crisis hit in 2008, he went way beyond the standard response of a central banker, which would have been to lower interest rates and hope that cheaper credit would somehow work its way to more borrowing, more activity, more jobs.

It hadn't worked that way in the Great Depression. Nobody wanted to borrow because there was no demand for their products and services. Bernanke understood that the full faith and credit of the U.S. government was required for a bailout, so he devised a whole menu of unique liquidity facilities to restore credit and confidence. More than a trillion dollars in lending programs helped troubled financial firms, especially the banks. Debt from industrial corporations was bought up, and distressed mortgage assets were put onto the Fed's books. The Fed's policy sustained money market funds, commercial paper, consumer loans and more. His intervention was decisive in easing the panic.

Bernanke's boldness no doubt stemmed from his intricate understanding of the Great Depression. He literally transformed the Fed into a daring, financial first-responder and an active market participant, rather than limiting it to its traditional role of controlling the money supply. Simultaneously he joined Treasury Secretary Hank Paulson on a visit to Capitol Hill to persuade terrified politicians to embrace the famously massive fiscal injection of the Troubled Asset Relief Program, or TARP. That was a close call, for at that fragile moment financial experts worried that the banks might not open the next morning.

Bernanke rallied both the Treasury Department and other central bankers around the world. He pushed other central banks to pursue expansion. Miraculously, the clogged arteries of the global financial system opened up. He leveraged whatever assets the Congress authorized him to deploy, and almost single-handedly steered the global economy back from the brink. In so doing he was able to secure enough time for the U.S. to stabilize the financial system and begin to heal its economy.

His greatest strength came from the authority endowed by his insight and understanding of the magnitude of the crisis at a time when Washington was in turmoil and the Obama presidency did not enjoy congressional confidence. Not so with Bernanke. He got behind a series of imaginative but untested emergency funding procedures for the banks. He used the Fed's balance sheet both uniquely and aggressively to buy not only short-term Treasury bills but also long-term bonds and mortgages as a way of manipulating prices and forcing policy interest rates down to virtually zero for an unprecedented period. This lowered both short- and long-term interest rates. He also didn't hesitate to suggest that the Fed would do even more if these measures didn't work.

Through it all, Bernanke retained a unique candor. He spelled out the costs and risks of these unconventional policies. He made it clear that the more the Fed had to persist, the more difficult it would be to get the world back into a state of normal balance.

To this day, the Fed has not yet been able to wind down his innovative policies – for good reason. The U.S. economy in the four years since the recession ended has been growing at less than half the rate of any other recession since World War II. We are still living with a real unemployment rate of at least 14 percent, punishing millions of a new "lost generation." Some 37 percent of the unemployed have been out of work for over six months. And we have failed to attain "escape velocity" to return to steady growth.

That is the justification – the imperative in Bernanke's view – for continuing to purchase Treasury and mortgage-backed bonds at the level of $85 billion a month, or a trillion dollars a year. He has managed this "quantitative easing" through three different phases and remains committed to continuing it to keep short-term interest rates at record-low levels at least until the unemployment rate falls to 6.5 percent.

And what did he receive for this from the president of the United States? A back-of-the-hand comment in a recent PBS television interview with Charlie Rose that the Federal Reserve chairman had stayed longer than he wanted or was supposed to. This made it clear that Bernanke's days as Fed chairman were numbered despite his unpredicted triumph. This was all done with just seven months left in his appointed term, thus depriving the chairman of the dignity of making his own announcement and even precluding the decision that he might not want to re-up for another tour of duty after eight exhausting years of the worst economic and financial crisis since the 1930's.

The market naturally reacted to President Obama's statement. The equity market lost hundreds of millions of dollars in the next two days. It was not the send-off that Bernanke deserved. The best the president could muster by way of complimenting this brilliant and courageous man was to describe him as an "outstanding partner" with the White House. Partner? The White House was the critical player here only in the sense that its economic policies had drained the confidence of the business community. (By the way, since the Federal Reserve is an independent agency overseen by Congress, no Fed chairman reacts well to the description of "partner," for it undermines the integrity and independence of the Federal Reserve and its leader.) And the stab in the back was carried out while Bernanke was conducting an important Federal Open Market Committee meeting.

It could be argued that Bernanke has made mistakes. He was perhaps a little loose in implying that the Fed might soon cut back its stimulus efforts. But his remarks were intended to minimize speculative activity that relied on the Fed's buying of these bonds, and calm was soon restored.

History will marvel at the role that he played in his seven tumultuous years, intervening so bravely and boldly in Wall Street in ways never before contemplated. As the only operator in Washington who was capable of juicing up the economy in the short term, there is now a fear that when Bernanke quits there will be nobody in Washington capable of leading us out of the unemployment and underemployment that is devastating millions of Americans.

But he leaves a legacy: Buying bonds without limits to their quantity or duration is now an acceptable policy. The financial markets have also adjusted to having the Fed as a key participant, which is a dramatically different role than that of monetary policymaking.

Bernanke's Fed was quite simply our last hope, preventing an economy from sliding into a financial abyss. Our economy still has a way to go before it regains full strength, but the president's mean-spirited dismissal of perhaps the greatest central banker in our history is yet another indication of an administration that has no clue of how serious the country's current economic condition is. What a shame to have so cavalierly treated the very architect of the policies that saved America from another Great Depression.

I know a lot of intelligent people support this line of thought, but I am going to disagree. What Zuckerman says here is quite wrong IMHO.

The correct response was NOT was Bernanke has done. While a VERY short term response from the Fed may well have been appropriate, the correct response would have been precisely was NOT done-- to let those who fuct up go bankrupt. This does NOT mean that depositors would have been wiped out-- that is precisely what the FDIC is for after all. It DOES mean that the officers and Board of Directors would be out of work and equity (shareholders) would be wiped out per the same bankruptcy laws that apply to everyone else. The banks would be put up for auction (via the bankruptcy courts?) and new ownership would take over. This has been done with major airlines without interruption and I do not see why it could not have been done here. Instead, the savers of America have been brutally anally raped for the last five years so the bankers who made the mistakes (and worse?) can get fat on the carry trade. These policies have made things worse, not better.

For his piece, Brilliant Fed Chair and the Clueless President, we should at least give Mort Zuckerman credit for getting the second half right.

If we look at the financial crisis period alone, my view is not that what Bernancke did was right but that he might be forgiven for taken such bold and decisive actions and preventing a freefall from doing far more damage than it did. That said, I agree with Crafty. Propping up failed organizations, rewarding failure, and not allowing the bankruptcy process to work properly were all bad aspects of his governance, and tend to make recurrence likely. Worse yet are his actions and inactions before and after the crisis.

I posted recently people should run and scream when you hear crony government terms public-private partnerships. That is exactly what we had - on steroids - with the Bernancke-managed bail ous and mergers of banks, investment houses and insurance companies, some insured, some not, Goldman Sachs, JP Morgan, AIG, and on and on. Though the aim was to minimize the fall and what the Fed would ultimately have to cover, this was the unauthorized war powers act for monetary affairs. The precedent now set is that the Fed has no monetary limits.

Let's say we forgive about 6 months of actions taken in a crisis that thwarted a worse meltdown and likely saved the Treasury money, how does the rest of his governance look?

Coming into the housing-caused financial crisis, did we know housing values were insane - and over-leveraged? Yes, without a doubt. Did anyone say or do anything about it? No. For the Fed Chair as a co-conspirator in the mess to not have seen an abrupt correction coming is somewhere between negligent and criminal.

After the crisis, it is argued that monetary policy is just about right for the conditions. Price levels have been relatively steady. I call steering the car away from accidents - by looking in the rear view mirror. We don't yet know the damage done by current, reckless policies.

Zuckerman may believe Bernancke did this impossible job brilliantly. I say he did it recklessly, issuing trillions in pretend bonds that in fact have no buyers. When the crisis was over, he had no business playing unauthorized games with the US Dollar and Treasury. As described previously, the economy was a car running with three flat tires and his only tool was to add more and more gasoline, while saying that the flat tires of over-spending, over-taxing and over-regulating are not under his jurisdiction. Maybe so but he was the enabler. It the fiscal geniuses had to pay their way, or at least borrow it, some form of responsibility would have hit the powers in Washington far sooner. For five years and counting he is acting as if we are still in a financial meltdown, while in fact he is CAUSING the next one.

Most strange is that he is being 'let go' by the administration for not going far enough - in the wrong direction.

Even after seven years of writing macroeconomic analysis for the liberty movement and bearing witness to astonishing displays of financial and political stupidity by more "skeptics" than I can count, it never ceases to amaze me the amount of blind faith average Americans place in the strength of the U.S. dollar. One could explain in vast categorical detail the history of fiat currencies, the inevitable destruction caused by inflationary printing and the conundrum caused when any country decides to monetize its own debt just to stay afloat - often, to no avail.

Bank bailouts, mortgage company bailouts, Treasury bond bailouts, stock market bailouts, bailouts of foreign institutions: None of this seems to faze the gibbering bobbleheaded followers of the Federal Reserve cult. Logic and reason and wisdom bounce like whiffle balls off their thick skulls. They simply parrot one of two painfully predictable arguments:Argument No. 1:There is no way foreign countries will ever dump the U.S. dollar because they are so dependent on American consumers to buy their export goods.Argument No. 2:There is no way the dollar's value will ever collapse because it is the dominant petro-currency, and the entire world needs dollars to purchase oil.I have written literally hundreds of articles over the years dismantling the first argument, pointing out undeniable signals that include:China's subtle dumping of the dollar - using bilateral trade agreements with other developing nations and, more recently, major economic powers like Germany and JapanThe massive gold-buying spree undertaken by China and Russia - even in the face of extreme market manipulation by JPMorgan Chase and Co. and CME Group Inc.The dumping of long-term U.S. Treasuries by foreign creditors in exchange for short-term Treasuries that can be liquidated at a moment's notice.The fact that bonds now are supported almost entirely by Fed stimulus. When the stimulus ends, America's ability to honor foreign debts will end and faith in the dollar will crumble.Blatant statements by the International Monetary Fund calling for the end of the dollar's world reserve status and the institution of special drawing rights (SDRs) as a replacement.The second argument held weight for a short time, only because the political trends in the Mideast had not yet caught up to the financial reality already underway. Today, this is quickly changing. The petrodollar's status is dependent on a great number of factors remaining in perfect alignment, socially, politically and economically. If a single element were to fall out of place, oil markets would explode with inflation in prices, influencing the rest of the world to abandon the greenback. Here are just a few of the primary catalysts and why they are an early warning of the inevitable death of the petrodollar.

Egyptian Civil War

I was recently contacted by a reader in reference to an article I wrote concerning the likelihood of civil war in Egypt, a civil war which erupted only weeks later.

She asked why I had waited until this year to make the prediction and why I had not called for such an event after the overthrow of Hosni Mubarak, as many mainstream pundits had. The question bears merit. Why didn't Egypt ignite with violent widespread internal conflict after Mubarak was deposed? It seemed perfectly plausible, yet the mainstream got the timing (and the reasons) horribly wrong.

My response was simple: The Mideast is being manipulated by elitist organizations towards instability, and this instability is a process. The engineered Arab Spring, I believe, is not so much about the Mideast as it is about the structure of the global economy. An energy crisis would be an effective tool in changing this structure. Collapse in the Mideast would provide perfect opportunity and cover for a grand shift in the global paradigm. However, each political step requires aid from a correct economic atmosphere, and vice versa.

If you want to identify a possible trend within a society, you have to take outside manipulation into account. You have to look at how economic events work in tandem with political events and at how these events benefit globalization as a whole. The time was not right after Mubarak's overthrow. The mainstream media jumped the gun. If the target is the U.S. dollar and Egypt is the distraction, this year presented perfect opportunity with the now obvious failure of quantitative easing stimulus being exposed.

As the situation stands, the Egyptian military regime that overthrew Mohammed Morsi has completely cut the Muslim Brotherhood out of the political process and murdered at least 450 protesters, including prisoners already in custody.

Morsi supporters have responded by torching government buildings and shooting police personnel. But the real fighting will likely begin soon, as the current government calls for a ban on the Muslim Brotherhood itself. Simultaneously, hatred for the United States and its continued support of the Egyptian power base - regardless of who sits on the throne - is growing to a fever pitch throughout the region. This is not healthy for the life of the petrodollar in the long run.

It is important for Americans to understand when examining Egypt that this is not about taking sides. The issue here is that circumstances are nearly perfect for war and that such a war will spread and will greatly damage oil markets. The Suez Canal accounts for nearly 8 percent of the world's ocean trade, and 4.5 million barrels of oil per day travel the corridor. Already, oil prices have surged due to the mere threat of disruption of the Suez (as I predicted). And this time, the nation isnotgoing to recover. A drawn-out conflict is certain, given the nature of the military coup in place and the adamant opposition of the Muslim population.

Strangely, there are still some in the mainstream arguing that the Suez will "never close" because "it is too important to the Egyptian economy," The importance of the Suez to the Egyptian government is irrelevant in the midst of all-out revolution. The Suez will close exactly because there will be no structure left to keep the canal open. In the meantime, oil prices will continue to rise and distrust of the United States will continue to fester.

Saudi Arabia Next?

The relationship between the United States and Saudi Arabia is at once symbiotic and parasitic, depending on how one looks at the situation. The very first oil exploration and extraction deal in Saudi Arabia was sought by the vast international oil cartels of Royal Dutch Shell, Near East Development Company, Anglo-Persian, etc., but eventually fell into the hands of none other than the Rockefeller's Standard Oil Company. The dark history of Standard Oil aside, this meant that Saudi business would be handled primarily by American interests. And the Western thirst for oil, especially after World War I, would etch our relationship with the reigning monarchy in stone.

A founding member of OPEC, Saudi Arabia was one of the few primary oil-producing nations that maintained an oil pipeline that expedited processing and bypassed the Suez Canal. (The pipeline was shut down, however, in 1983). This allowed Standard Oil and the United States to tiptoe around the internal instability of Egypt, which had experienced ongoing conflict which finally culminated in the civil war of 1952. Considered puppets of the British Empire at the time, the ruling elites of Egypt were toppled by the Muslim Brotherhood, leading to the eventual demise of the British pound sterling as the top petro-currency and the world reserve. The British economy faltered and has never since returned to its former glory.

On the surface, Saudi Arabia seems to have avoided the effects of the Arab Spring climate, but all is not as it seems. The defection of Saudi Prince Khalid Bin Farhan Al-Saud has brought up startling questions as to the true state of the oil producing giant.

I believe this defection is only the beginning of Saudi Arabia's troubles and that America's largest oil partner is soon to witness domestic turmoil that will disrupt oil shipments around the world. America's support for a monarchy that is so brutal to its population will only hasten the end of the dollar's use in global oil trade, especially if these puppet regimes are toppled.

For those who doubt that Saudi Arabia is in line for social breakdown, I would ask why the nation felt it necessary to pump billions of dollars into the new Egyptian military junta.

While the country is surely being used in some cases as a proxy by the West, the Saudi government itself is fearful that success of dissenting elements will spread to its own borders. Little do they understand that this is part of the globalist game plan. Without control over Saudi petroleum, the United States loses its last influential foothold in the oil market, and there is absolutely no doubt whatsoever that the dollar will fall as the petro-currency soon after. The desperation caused by such an energy crisis will make international markets beg for a solution, which global banking cartels led by the IMF are more than happy to give.

Iranian Wild Card

The U.S. government's outright creation of the Syrian insurgency and its funding and armament of al-Qaida agents have understandably angered numerous Mideast nations, including Iran. Iran sits on the most vital oil shipping lane in the world: the Strait of Hormuz. About 20 percent of the world's annual oil exports are shipped through Hormuz, and the narrow inlet is incredibly easy to block using nothing but deliberately sunken freighters. In fact, this tactic is exactly what Iran has been training for in order to frustrate a U.S./Israeli invasion.

A U.S. or NATO presence on the ground or in the air above Syria, Egypt or Iran will most likely result in the closure of the Strait of Hormuz, causing sharp rises in gasoline costs that Americans cannot afford.

Russia/China Oil Deal

Finally, just as most bilateral trade deals removing the dollar as world reserve have gone ignored by the mainstream media, so has the latest sizable oil deal between Russia and China. Russia has been contracted by the Chinese to supply 25 years of petroleum, and this deal follows previously established bilateral guidelines - meaning the dollar will not be used by the Chinese to purchase this oil.

I expect that this is just the beginning of a chain reaction of oil deals shunning the dollar as the primary trade mechanism. These deals will accelerate as the Mideast sees more internal strife and as the popular distaste for the United States becomes a liability for anyone in power.

The Dollar Is A Paper Tiger

Some might argue that oil discoveries in the Midwestern U.S. could be used to counter the disruption of oil pipelines in the Middle East, and certainly, there is much untapped oil in America. However, to claim that this oil would somehow negate a crisis is naive, primarily because oil supply is not the ultimate issue; the dollar's petro-status IS the ultimate issue. That status is dangerously reliant on the continued stability of Western friendly regimes in the East. We can produce all the oil we want within our own borders, but if the dollar loses global standing as the world reserve, we will STILL see a massive debasement of our currency's value, we will still see collapse, and I guarantee, most of our domestic oil will end up being exported as payment to foreign creditors just to satisfy outstanding debts.

The dollar is no more invincible than any other fiat currency in history. In some ways, it is actually far weaker than any that came before. The dollar is entirely reliant on its own world reserve status in order to hold its value on the global market. As is evident, countries like China are already dumping the greenback in trade with particular nations. It is utterly foolish to assume this trend is somehow "random" rather than deliberate. Foreign countries would not be initiating the process of a dollar dump today if they did not mean to follow through with it tomorrow. All that is left is for a cover crisis to be conjured. Existing tensions in the Mideast signal a pervasive crisis, most likely an energy crisis, in the near term.

Logged

"You have enemies? Good. That means that you have stood up for something, sometime in your life." - Winston Churchill.

Although the article you post echoes themes long expounded around here, I confess I find some of its logic rather , , , jumpy.

Has not Scott Grannis made good explanation of the difference between bank reserves and printing money?

Are pretro-dollars really the reason for the dollar's reserve currency role?

Why has gold dropped some 35% from its peak?

Although I have cannot check as I sit here in Switzerland on a system unfamiliar to me, my SWAG is that the dollar has gone UP along with US interest rates.

What currency would replace the dollar? Are people going to flee to the yuan? I think not. The Euro's very existence is in question. OF COURSE the IMF wants SDRs! It is in its bureaucratic interest- duh! When has the IMF ever been right about anything?

Does not international instability continue to produce a flight to the dollar?

This guy writes as if he has not noticed the substantial changes for the better in certain numbers that concerned this forum profoundly e.g. (working from memory here so I may be off somewhat but I think I have the gist of it correct) fed spending as a % of GDP down from 25% to 21%, deficit as a % of GDP down from 11% to 5 or 6% etc.

Compare the Euro. Compare China, which I believe to be a huge bubblel (see my posts in the China thread).

This is not to say that Baraq has not been a terrible president economically, socially, internationally, militarily, or legally-- he has been all of these and more. That said, that does not mean that this particular article's criticisms are particularly well thought out.

21% of GDP for fed spending and deficit of 5% is territory from which we have recovered before. We may well be about to become the Saudi Arabia of natural gas. Europe and Russia face demographic collapse while we maintain population. China may well be a bigger bubble than anyone realizes and the various Muslim groups of the mid-east and Afpakia are busy killing each other.

Hammering home my criticism of the piece's death of the dollar thesis, here is this from Stratfor. Yes, I know, as usual Strat's economics is contaminated by glib Keynesianism, but I post here for its reportage of currency movements.

The ongoing slide in global currencies may have more advantages for the affected countries than many observers suspect. Nevertheless, a number of important countries are at risk of instability as the global financial system undergoes a correction. The U.S. economy is slowly recovering, a change that prompted Ben Bernanke, the chairman of the U.S. Federal Reserve, to first hint in May that the Fed might pull back on the asset buyback program that has injected tens of billions of dollars every month into the U.S. financial system.

The Fed's hint that it is confident enough in U.S. growth to pull back on its quantitative easing program has triggered investors to reconsider their positions. Capital has flooded back into dollar markets, bringing down the relative value of most major developing countries. The ongoing slide in currencies and stock markets around the world has prompted enormous concern among national leaders. Just Thursday, Brazil's Central Bank President, Alexandre Tombini, cancelled a planned trip to the United States to stay at home and address the challenges of the country's currency devaluation.

What is a Geopolitical Diary? George Friedman explains.

For countries like Brazil, where inflation haunts the national consciousness, devaluation threatens to upset the government's fragile efforts to ensure that inflation targets are not threatened by the rising price of imports that devaluation will inevitably cause. Rising prices threaten consumer (and therefore voter) satisfaction and undermine the possibility of consumption driving aggregate growth. Recent investment in Brazil has been dominated by direct investment in manufacturing and commodities extraction. This kind of investment is less likely to be deterred by current market pressures, which prompt investors to pull out of currencies, stocks and bonds.

The countries most affected when investors flee emerging markets are those that rely on the fickle inflow of investment to balance out longstanding deficits in trades and services. These include Turkey, which has seen its financial and capital accounts plummet, triggering a negative balance of payments in May and June alongside a steep dive in the value of the Turkish lira. India is also vulnerable, with a deep trade deficit due to a persistent reliance on energy imports. Other countries are on the edge. Indonesia, for instance, only developed a deficit in the trade of goods and services at the end of 2011, and Jakarta has wavered between balance of payments deficits and surpluses since that time.

Tools exist for countries to combat market pressures that might otherwise cause massive disruptions in local economies. Turkey intervened in currency markets by auctioning $350 million in foreign exchange Thursday. Indonesia raised interest rates in June -- which they hope will have the effect of attracting foreign currency deposits -- and has increased reserve requirements for banks in an effort to slow inflation. High foreign currency reserves remain the critical factor in helping countries balance and maintain their financial stability in times of global turmoil.

The fear is that the current slide in currencies is a replication of the crisis that shook markets 16 years ago. This concern is particularly acute in Southeast Asia, where memories of the 1997 collapse of the Asian Tigers are painfully fresh. It is not clear yet how far this process will take the region, but it is clear that this is a global phenomenon affecting a range of countries -- and domestic vulnerabilities will be the deciding factor. The difference this time around is that oil prices have made what appears to be a secular shift to a much higher range. Oil prices in 1997 were a fraction of their current level, and this has contributed to aggravating trade deficits. These deficits were perhaps affordable in times of growth, but with global economic uncertainty prevailing, they have become a serious liability.

Yet despite the anxiety in the press and the statements of alarm from public officials, it's not all bad news for developing economies. Corrections and rebalancing are a natural part of the economic process, and currently, capital that was pushed overseas by the Fed's actions and by low economic growth is returning. This cannot help but have a depressing effect on the countries that had absorbed that excess capital. Slower growth will push down wages, and weaker currencies will improve the competitiveness of exports. These factors can aid some countries as they compete to attract export-oriented investment. As long as such countries keep domestic unrest in check -- particularly in Latin America and Southeast Asia -- they can improve their access to job-creating foreign direct investment.

Read more: The Upside of the Slide in Global Currencies | StratforFollow us: @stratfor on Twitter | Stratfor on Facebook

Gold 'will hit $1,500’ as investors seek safe haven Gold could climb to $1,500 (£968) an ounce if military action is taken against Syria, City analysts predict.

The upward trend of the great bull market has been broken. The technical damage is brutal. Bank of America expects a further drop to $1,200. Be patient Photo: Alamy By Emma Rowley9:30PM BST 31 Aug 2013 46 Comments

The yellow metal climbed above the $1,433 mark on Wednesday, its highest level since mid-May, as tensions around Syria increased its allure as a “safe haven”. On Friday it ended the week at $1,395 against its late-June trough of $1,180 an ounce.

“Safe-haven and geopolitical hedges are back in vogue,” said analysts at HSBC. The metal’s price has passed both its 50-day and 100-day moving averages this month, setting it on course for the $1,500 mark. “Gold is now decisively through previous resistance and is pushing higher towards the $1,500-$1,532 area,” said Citigroup’s technical research team in a recent note.

The threat to supply from a strike in the South African gold sector announced for the coming week could also push prices higher, while jewellery-buying in China and India to take advantage of the price weakness has been offering support.

Any move further upwards could be short-lived, however. In the longer term, many expect concerns about “tapering” by the Federal Reserve — the unwinding of its vast, inflationary monetary stimulus — will dull gold’s appeal. If the US central bank does start curbing its $85bn-a-month bond-buying programme in September that would dent the metal, which benefited from this flood of liquidity.

Ed Morse, Citigroup’s chief commodities analyst, said while the action in the gold market was “understandable, it’s all related to political risk insurance as perceived by participants in the market”, and the price should drop back. “Once military action has been taken, the gold market will sell off,” he said.

Gold hit a high of $1,900 an ounce in September 2011, but when inflation is taken into account that does not compare with its 1980 high of $873 — $2,475 an ounce in current money.

Tensions over Syria have also pushed oil higher, with Brent settling at $114 a barrel on Friday.

We’ve been bond bears for quite some time, and we still are. The good news is that the violent part of the bear market has passed. We expect a slower, but still painful and consistent, move higher in interest rates during the quarters ahead. The 30-year bull market in bonds is over.

The low in yields, after a 30+ year bull market, was seen in the past few years. In past cycles (mid-1970s, 1992, 2004), when the Fed had reached its most accommodative stance, when the federal funds rate was at its lowest point, the spread between the 10-year Treasury and the funds rate was 3.5% or a little higher. This is because long-term investors thought short-term rates would rise in the future.

In the most recent cycle, with the Fed promising to hold rates down for a long time and telling the market it would end QE before lifting rates, the yield spread collapsed and the 10-year went as low as 1.5%. Now, with the Fed preparing to taper QE, the specter of higher short-term rates is pushing the yield curve toward historical norms.

This does not mean bond yields are about to catapult into the stratosphere. The US is not Argentina, or Weimar Germany, or Yugoslavia, and QE can be unwound without creating hyper-inflation. In the past sixty years, including the double-digit inflation of the 1970s, the yield on the 10-year Treasury Note has never been more than 385 basis points higher than the funds rate.

Think of it like a boat with an anchor. The 10-year bond is the boat, on the surface, moving back and forth with the waves. But the anchor, the federal funds rate, remains locked in position by the Fed. The chain between the anchor and the boat is the yield spread. As long as the chain doesn’t break, there’s only so far the boat (and the 10-year) can go.

In Argentina the chain broke (with hyper-inflation, 10-year bonds denominated in pesos weren’t possible). In the US, the chain has never broken. And if it held in the 1970s, with double-digit inflation and an expanding government share of GDP, it’s hard to make the case that it won’t hold today.

Inflation remains relatively subdued, with the consumer price index (including food and energy) up only 2% versus a year ago. We expect inflation to move higher, but we don’t expect hyperinflation. Yes, QE has expanded the Fed’s balance sheet enormously, but, it has been contained in excess reserves and has not led to a sharp expansion in the M2 money supply.

The reason talk of tapering lifted bond yields this past spring was because the Fed will end QE before it lifts rates. In other words, tapering is a sign short-rates are eventually headed higher and when the market expects this it automatically prices in higher long-term interest rates. In other words, the bond market is normalizing and the bear is coming out of a 30-year hibernation.

"The US (in 2013) is not Argentina, or Weimar Germany, or Yugoslavia,"

- No, but he does recognize that people see the resemblance.

"QE can be unwound without creating hyper-inflation."

- The typesetters forgot to put a question mark at the end of that uncertainty. He may be right; hyper-inflation may not be the worst ailment to come out of the QE 'unwinding'. We may soon know the real answers to this. Or will they keep the economic news bad enough to keep the faucet open 3 more years.

Isn't the fact that everyone agrees an unwinding is required in itself evidence that the markets and the economy currently have a drug-like addiction to the wrong-headed, ongoing, multi-trillion dollar, artificial monetary stimulus. BTW, how many net full time jobs did it create? At what cost??

No concern expressed by Wesbury that the number one criteria for picking the next chair is that he/she must strongly support the wrong side of the dual mandate. Good luck America.

"No concern expressed by Wesbury that the number one criteria for picking the next chair is that he/she must strongly support the wrong side of the dual mandate. Good luck America."

Actually, he had a separate piece supporting Larry Summers over , , , whatshername precisely because he would take a harder line on monetary policy.

That is good, Summers is marginally better than Janet Yellen, but what I mean is that Wesbury's optimism doesn't flinch in the face of:

a) The Marginal tax rate increase, anti-investment act

b) The Obamacare anti-employment act

c) Explosion of other new regulations, anti new businesses act

d) The resulting shrinking of the workforce, based on the above

e) Growth slowdowns in the former high growth areas of the world, China, India, Korea, etc.

f) The declared War on Fracking, refusal to build nuclear, anti-pipeline, anti-drilling policies - trying to take down the only economic good news going

g) Impending Middle East wars, resulting spikes in oil prices etc.

and now,

h) The President announcing his number one criteria in picking a Fed chair for the next 6 years is that his choice will be committed to running the Fed in the exact opposite direction of what we know is right, a sole focus on sound money.

Wesbury may not flinch but markets do. The view that these policies and circumstances don't matter to an economy is easily proven wrong. The Dow, NASDAQ and S&P 500 are up 100% since 2009 lows. People investing new money today (what new money?) think the lines below can only go up? In the face of all we know right now? To that view I say good luck.